MANAGEMENT FUNCTIONS

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					    Part two
Accounting Equation
A1
              Accounting Equation

                     EQUITY

     Assets    =   Liabilities   +   Equity
A1
                    Assets

                        Cash
      Accounts                          Notes
     Receivable                       Receivable
                      Resources
                      owned or
     Vehicles       controlled by a        Land
                      company

          Store                       Buildings
         Supplies
                        Equipment
A1              Liabilities


     Accounts                  Notes
     Payable                  Payable

                 Creditors’
                 claims on
                   assets
      Taxes                   Wages
     Payable                  Payable
A1    Equity

       Owner
     Investments




     CAPITAL
           Expanded Accounting
A1
                Equation

     Assets     =      Liabilities       +        Equity



                _     Owner                       _
Owner Capital
                    Withdrawals   +    Revenues       Expenses




                      Owner's Equity
              Transaction Analysis
A2
                   Equation
       The accounting equation MUST remain in
            balance after each transaction.

     Assets     =   Liabilities   +   Equity
A2     Transaction Analysis

     J. Scott invests $20,000 cash to start the
                    business.

        The accounts involved are:
     (1) Cash (asset)
     (2) Owner Capital (equity)
 A2          Transaction Analysis

J. Scott invests $20,000 cash to start the business.

                   Assets           =       Liabilities       +    Equity
                                        Accounts     Notes         Owner
       Cash   Supplies Equipment        Payable Payable            Capital
 (1) $ 20,000                                                     $ 20,000




      $ 20,000 $      -     $   -       $    -   $      -         $ 20,000

               $ 20,000             =            $   20,000
A2       Transaction Analysis

      Purchased supplies paying $1,000 cash.



     The accounts involved are:
      (1) Cash (asset)
      (2) Supplies (asset)
A2       Transaction Analysis

      Purchased supplies paying $1,000 cash.



     The accounts involved are:
      (1) Cash (asset)
      (2) Supplies (asset)
A2          Transaction Analysis

        Purchased supplies paying $1,000 cash.
                  Assets            =       Liabilities       +    Equity
                                        Accounts     Notes         Owner
      Cash     Supplies Equipment       Payable Payable            Capital
(1) $ 20,000                                                      $ 20,000
(2)    (1,000) $ 1,000




     $ 19,000 $    1,000 $   -          $    -   $      -         $ 20,000

              $ 20,000              =            $   20,000
A2     Transaction Analysis

     Purchased equipment for $15,000 cash.


     The accounts involved are:
      (1) Cash (asset)
      (2) Equipment (asset)
A2           Transaction Analysis

          Purchased equipment for $15,000 cash.
                Assets              =       Liabilities       +    Equity
                                        Accounts     Notes         Owner
      Cash     Supplies Equipment       Payable Payable           Capital
(1) $ 20,000                                                      $ 20,000
(2)    (1,000) $ 1,000
(3)  (15,000)           $ 15,000


     $   4,000 $ 1,000 $   15,000       $    -   $      -         $ 20,000

              $ 20,000              =            $   20,000
A2          Transaction Analysis

       Purchased Supplies of $200 and Equipment
                 of $1,000 on account.

     The accounts involved are:
      (1) Supplies (asset)
      (2) Equipment (asset)
      (3) Accounts Payable (liability)
A2           Transaction Analysis

     Purchased Supplies of $200 and Equipment
               of $1,000 on account.
                Assets               =       Liabilities        +    Equity
                                         Accounts     Notes          Owner
      Cash     Supplies Equipment        Payable Payable            Capital
(1) $ 20,000                                                        $ 20,000
(2)    (1,000) $ 1,000
(3)  (15,000)           $ 15,000
(4)                200       1,000       $ 1,200

     $   4,000 $ 1,200 $   16,000        $ 1,200 $        -         $ 20,000

              $ 21,200               =             $   21,200
A2        Transaction Analysis

     Borrowed $4,000 from 1st American Bank.

     The accounts involved are:
       (1) Cash (asset)
       (2) Notes payable (liability)
A2          Transaction Analysis

     Borrowed $4,000 from 1st American Bank.
               Assets                =       Liabilities        +    Equity
                                         Accounts     Notes          Owner
      Cash     Supplies Equipment        Payable Payable            Capital
(1) $ 20,000                                                        $ 20,000
(2)    (1,000) $ 1,000
(3)  (15,000)           $ 15,000
(4)                200       1,000       $ 1,200
(5)     4,000                                    $      4,000
    $ 8,000 $ 1,200 $ 16,000             $ 1,200 $      4,000       $ 20,000

              $ 25,200               =             $   25,200
A2             Transaction Analysis

       The balances so far appear below. Note that the Balance
                  Sheet Equation is still in balance.
                       Assets              =        Liabilities       +    Equity
                                               Accounts Notes              Owner
           Cash   Supplies Equipment           Payable Payable             Capital
     Bal. $ 8,000 $ 1,200 $ 16,000             $ 1,200 $ 4,000            $ 20,000




         $   8,000 $    1,200 $   16,000       $   1,200 $    4,000       $ 20,000

                   $ 25,200                =              $ 25,200
A2   Transaction Analysis



      Now, let’s look at transactions
     involving revenue, expenses and
                withdrawals.
A2         Transaction Analysis

Provided consulting services receiving $3,000 cash.


     The accounts involved are:
      (1) Cash (asset)
      (2) Revenues (equity)
 A2                Transaction Analysis

  Provided consulting services receiving $3,000 cash.

                   Assets              =      Liabilities      +         Equity
                                           Accounts Notes           Owner
      Cash   Supplies Equipment            Payable Payable          Capital Revenue
Bal. $ 8,000 $ 1,200 $ 16,000              $ 1,200 $ 4,000         $ 20,000
(6)    3,000                                                                $ 3,000


      $ 11,000 $    1,200 $   16,000       $ 1,200 $ 4,000         $   20,000 $   3,000

               $ 28,200                =            $ 28,200
A2        Transaction Analysis

       Paid salaries of $800 to employees.

     The accounts involved are:
      (1) Cash (asset)
      (2) Salaries expense (equity)
       Remember that the balance in the salaries expense
                  account actually increases.
        But, equity decreases because expenses reduce
                            equity.
  A2                 Transaction Analysis

                Paid salaries of $800 to employees.
                    Assets             =      Liabilities      +                  Equity
                                           Accounts Notes           Owner
      Cash     Supplies Equipment          Payable Payable          Capital Revenue Expenses
Bal. $ 8,000 $    1,200 $ 16,000           $ 1,200 $ 4,000         $ 20,000
(6)     3,000                                                               $ 3,000
(7)      (800)                                                                      $    (800)

       $ 10,200 $     1,200 $ 16,000       $ 1,200 $ 4,000         $   20,000 $     3,000 $   (800)

                $    27,400            =            $ 27,400


            Remember that expenses decrease equity.
A2         Transaction Analysis

     A withdrawal of $500 is made by the owner.
     The accounts involved are:
      (1) Cash (asset)
      (2) Withdrawals (equity)
         Remember that the withdrawal account actually
                              increases.
        But, total equity decreases because the withdrawal
                           reduces equity.
  A2                   Transaction Analysis

          A withdrawal of $500 is made by the owner.

                  Assets              =      Liabilities       +                        Equity
                                          Accounts Notes             Owner          Owner
       Cash      Supplies Equipment       Payable Payable            Capital     Withdrawals     Revenue     Expenses
Bal. $   8,000 $     1,200 $ 16,000       $ 1,200 $ 4,000          $    20,000
(6)      3,000                                                                                   $   3,000
(7)       (800)                                                                                              $   (800)
(8)       (500)                                                                $         (500)
     $   9,700 $     1,200 $ 16,000       $ 1,200 $    4,000       $    20,000 $         (500) $     3,000 $     (800)

              $     26,900            =            $ 26,900




          Remember that withdrawals decrease equity.
       Account Definition



• An Account is a separate record for each
  type of asset, liability, equity, revenue, and
  expense used to show the beginning
  balance and to record the increases and
  decreases for a period and the resulting
  ending balance at the end of a period.
You should be aware that All Accounts:

• Can Be Debited and Credited Have an Increase Side
  (Column) and a Decrease Side (Column)
• Have a Debit Side (Column) and a Credit Side (Column)
  Debit Side is the Left Side (Left Column)
  Credit Side is the Right Side (Right Column)
• Have a Type and are classified as an Asset, Liability,
  Equity, Revenue, Expense, or Draw
• Are Either a Balance Sheet or Income Statement
  Account
• Have a Normal Balance Amount that is normally a Debit
  Balance or a Credit Balance
Normal Account Balance
• Debit Balances
• Asset - Normally a Debit Balance
• Draws - Normally a Debit Balance
• Expense - Normally a Debit Balance
  Credit Balances
• Liabilities - Normally a Credit Balance
• Owner's Equity ( Capital ) - Normally a
   Credit Balance
• Revenue - Normally a Credit Balance
(1)Memorize the definitions for debits and
  credits.
• Debit - An entry (amount) entered on the left
  side (column) of a journal or general ledger
  account that increases an asset, draw or an
  expense or an entry that decreases a liability,
  owner's equity (capital) or revenue.
• Credit - An entry (amount) entered on the right
  side (column) of a journal or general ledger
  account that increases a liability, owner's equity
  (capital) or revenue, or an entry that decreases
  an asset, draw, or an expense.
• A debit increases an asset while a credit decreases an asset.

• A debit decreases a liability while a credit increases a liability.

• A debit decreases owner's equity while a credit increases owner's
  equity.

• A debit decreases revenue while a credit increases revenue.

• A debit increases an expense while a credit decreases an expense.

• A debit increases a draw while a credit decreases a draw.

				
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posted:11/15/2011
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